break even point – the point at which the money a company makes from the sale of goods or services is equal to the money it has spent

Note: At this point there is neither profit or loss, it is zero profit.

To remember what break even point means use the following mnemonic:

They didn't have a break even when they were hungry, they didn't see the point (break even point). The workers wanted to ensure the company made an amount of money equal to what it spent at least.

If someone decides to open a hamburger stand, before they do so, they should work out how many hamburgers they need to sell per month to cover their costs. Figuring this out will give the number of hamburgers they need to sell just to have zero profit and zero losses, or in other words to “break even”.

If they don’t believe they can sell enough hamburgers to break even, then they shouldn’t try to open as they will soon go bankrupt.

So how would you work out the amount of a product to sell just to break even? Use the following formula:

Break\ Even\ Number\ of\ Units\ =\ \frac{\textit{Fixed Costs}}{\textit{Sales Price Per Unit} - \textit{Cost Price Per Unit}}

For another example, a company that sells sofas has fixed costs of £600,000/month (rent, utilities, rates), and it sells sofas for £600 each. Variable costs (materials and shop labour) are £300 per sofa, so the break-even is:

Break\ even\ number\ of\ units\ =\ \frac{£600,000}{£600-£300}

Break even number of units = 2,000 units

You would need to sell 2,000 sofas just to break even

What if the sales in the month are not enough to break even? You can see from the formula that there are only two things you can do, either raise the price of your product or cut the costs (either fixed or variable).

Let’s say you find a way to reduce your costs and instead of each sofa costing £300 it costs £200, therefore the new break even number of units is:

Break\ even\ number\ of\ units\ =\ \ \frac{£600,000}{£600-£200}

Now you need only sell 1,500 units to break even.

You can now see why knowing the businesses break even point is so important. The decision you make about pricing your product, the costs you incur in business and sales volume are all interrelated. The break even point is often an essential first step in establishing a sales price point that ensures profit.